On Wednesday the Chancellor delivers the Budget. Last November Philip Hammond announced that the Budget will in future move to the autumn. So this will be the first of two this year and the last one in spring - until a future Chancellor moves the timing back again.
Whether it is because there are two Budgets this year - and because so little has changed since last November's Autumn Statement - or because of other factors such as the focus on Brexit, it is hard to remember such a low key build up to this showpiece occasion. But that in itself may be a good thing. In recent years the big piece economic events - such as the Autumn Statement and Budget - have too often been overtaken by short-term political tactics rather than longer-term strategic thinking. One imagines that, for now at least, the focus will be different.
One noticeable aspect of last November's Autumn Statement was the unveiling of a National Productivity Investment Fund. The combination of a focus on infrastructure, alongside an enabling environment for the private sector is key. The economy needs a combination of infrastructure, innovation and investment, helped by the right policy incentives in which all this can take place. This focus on the longer-term, including steps to boost UK productivity, is likely to be an ongoing policy focus in this and coming Budgets.
Less welcome last November was the low key or downbeat nature of the delivery. It came across as if the Chancellor had already adopted the implicit mantra of the Treasury that Brexit was about making the best of a bad job. Of course, it is not. But the lack of a delivery of a powerful upbeat vision left what would otherwise had been a good Autumn Statement slightly flat.
The Prime Minister has outlined a clear Brexit strategy to reposition the UK in the changing global economy. This needs to be judged alongside the government's domestic economic agenda. The combination of the two will determine the scale of the success of government policy and how smooth and successful exiting the EU will be.
So where will the Chancellor’s focus lie in this year’s Budget?
A resilient economy
Although it is hard to imagine anything too exciting happening in this Budget, I would expect the Chancellor to highlight the resilience of the economy and the reduction in the budget deficit. He will likely predict solid growth this year and some slowdown next. At the same time, he is likely to stress that he needs to remain fiscally prudent in order to reduce the deficit further. I would also expect him to reiterate his commitment to raising the personal allowance and to ensuring more people share in economic success.
Tax squeeze on the way?
There may, however, be an attempt to squeeze more tax in other areas - cutting tax relief on pension contributions has long been mentioned in recent years. Also the Chancellor will continue to implement an underlying theme of the Autumn Statement: boosting spending in areas that support the industrial policy, while trying to curb the overall amount of government spending. In short, better quality rather than increased quantity of spending. There are, however, pressure points in terms of spending, not least the need to find more to fund social care and the health service. So whether he can find spending for these now, or whether he will wait until later in this Parliament, remains to be seen.
Economic growth forecasts
In November we were told that the official growth projections from the independent Office for Budget Responsibility (OBR) were 2.1% in 2016, 1.4% in 2017 and 1.7% in 2018. I would expect the figure for 2017 to be revised up, although it would not be a surprise if the OBR expected some slowdown in subsequent years, before the economy returns to trend growth around, or just over, 2%.
The economy has grown solidly since last June. Even though the UK has not yet left the EU, businesses, people and financial markets have clearly already started to discount the fact that we will. The economic collapse and financial Armageddon predicted by the Treasury and the bulk of economists if there was to be a vote to Leave has not materialised.
As I outlined before June, we felt then that the economic impact from a Leave vote would be similar to 1992, and leaving the old European Exchange Rate Mechanism (ERM). Monetary growth was already growing solidly last June and the subsequent Sterling depreciation and further stimulus from the Bank of England, alongside the boost seen in consumer confidence and increased household borrowing, has given the economy a further lease of life.
Treat fiscal numbers with caution
In November the independent OBR revised its fiscal projections to show larger borrowing than expected in last March's Budget. This time, it is likely to unwind some of its expected fiscal deterioration this time, giving the Chancellor more room for fiscal manoeuvre than previously expected.
The Budget usually unveils fiscal numbers for five years ahead and there is now an annoying tendency to aggregate any fiscal changes over this period to produce headline-grabbing figures. This is all nonsense of course. The margin of error on fiscal numbers is huge, even over a one-year period, never mind five. Also these are forecasts, which in the past have proved to be very wide of the mark. Thus there is a need to treat the numbers with a degree of caution. Yet, the strategy underpinning the policy and the direction of travel is key.
Helped by the economy's resilience, the Chancellor's fiscal sums are in far better shape than the Treasury expected. It highlights that the best way to reduce the budget deficit is not through outright austerity but through stronger economic growth - that boosts nominal GDP and tax revenues. This needs to be alongside sensible curbs on government spending.
Sluggish tax revenues a concern
A worrying feature underpinning the fiscal numbers in November was that tax revenues had been sluggish in the first half of the fiscal year. When the tax take is measured in proportion to the size of the economy it varies from year to year, but during the 1980s it fell significantly, from above 40% to the low 30s. In recent years, however, it has hovered around just above 35%, with latest projections suggesting it will rise gradually in coming years. There are serious questions as to whether this can be squeezed higher without the economy suffering - I am not convinced it can, although a different approach to the taxation of housing may be explored in the future.
Mitigating the business rates hike
Because the UK still has a sizeable budget deficit the Treasury appears to be under constant pressure to raise taxes where it can. This is not without its problems, as has been highlighted by the recent increase in business rates. At a time when retaining confidence is key, the decision to impose significant rises in business rates among some groups of small firms may force the Chancellor to look for additional funds this week to ease the transition. Notwithstanding this, one of the trends in recent years has been the cost of implementing specific tax commitments: increasing personal tax allowance, cutting corporation tax and periodic decisions to freeze fuel duty.
While the Chancellor may be under pressure to ease the pain on business rates, there is always the possibility that he will try and raise taxes in other areas. Ones that have been speculated about include limiting tax relief on pensions, and aligning national insurance payments for the self-employed with those in employment. From an economic perspective and in the face of global competition, there is a strong argument to limit the upward trend in the tax take and in the process keep income and corporation taxes as low as possible to help economic incentives. I think they should also be kept as simple as possible, avoiding tinkering in such showcase occasions.
Policy in a post-Brexit Britain
In my view, Brexit allows the UK to position itself in a competitive, fast-changing and growing global economy. President Trump aims to pursue policies aimed at cutting taxes and easing regulations. Even though the Chancellor may not have much room for manoeuvre, he has to be congratulated for making clear the UK is still keen to head in the direction of lower taxes and easing the burden on business.
Also welcome has been the government's focus on an industrial strategy. For the first time in decades one can be genuinely positive about the main thrusts of policy. But, there is much more that needs to be done.
Westminster - and business - should be excited about the ability to return ‘competencies’ from Brussels in so many areas, including state aid and regional policy, and a sensible migration policy. Alongside this there is no doubt that there are many things that we could have done better while in the EU that we need to do better now, not least in education and skill training.
Budget Day: the impact on financial markets
In addition to the specific measures, the question is how will financial markets be impacted? It is hard to imagine any immediate impact on monetary policy. The Bank of England looks set to keep interest rates on hold. Also the global reflation that has been underway since last year - seen in terms of easing fiscal policies, and still accommodative monetary policies - looks set to continue, helping global growth.